Example: A taxpayer receives $96,000 of insurance proceeds upon the destruction of section 1250 property by fire. If section 1250(d)(4)(A) did not apply to the disposition, $16,000 of gain would be recognized under section 1250(a). In acquisitions qualifying under section 1033(a)(3)(A), he uses $90,000 of the proceeds to purchase property similar or related in service or use to the property destroyed, of which $42,000 is for one item of section 1250 property and $48,000 is for one piece of land, and $5,000 of the proceeds to purchase stock in the acquisition of control of a corporation owning property similar or related in service or use to the property destroyed. The taxpayer properly elects under section 1033(a)(3)(A) and the regulations thereunder to limit recognition of gain (determined without regard to section 1250) to $1,000, that is, the excess of the amount realized from the conversion ($96,000) over the cost of the property acquired in acquisitions qualifying under section 1033(a)(3)(A) ($95,000, that is, $90,000 plus $5,000). The amount of gain recognized under section 1250(a) is $6,000, determined in the following manner:
The first limitation: | |
(a) Amount of gain recognized under section 1033(a)(3), determined without regard to section 1250(a) | $1,000 |
(b) Fair market value of stock in a corporation which qualifies under section 1033(a)(3)(A) | 5,000 |
(c) Sum of (a) plus (b) | 6,000 |
The second limitation: | |
(d) Amount of gain which would be recognized under section 1250(a) if section 1250(d)(4) did not apply | 16,000 |
(e) Cost of section 1250 property acquired in transaction | 42,000 |
(f) Excess of (d) over (e) | 0 |
Since the first limitation ($6,000) exceeds the second limitation (zero), the amount of gain recognized under section 1250(a) is $6,000. The balance ($10,000) of the gain realized ($16,000) is not recognized.
To C: $12,000 * ($10,500/$42,000) | $3,000 |
To D: $12,000 * ($31,500/$42,000) | 9,000 |
Total | 12,000 |
The total basis of $18,000, as determined in example (1), for the land is allocated as follows:
To X: $18,000 * ($12,000/$48,000) | $4,500 |
To Y: $18,000 * ($36,000/$48,000) | 13,500 |
Total | 18,000 |
Example:
Fair market value of property | ||
Disposed of | Acquired | |
Section 1245 property | $35,000 | $55,000 |
Section 1250 property | 45,000 | 28,000 |
Land | 20,000 | 12,000 |
Cash | 5,000 | |
100,000 | 100,000 |
Property disposed of | Property acquired | Cash Remaining | ||
Sec. 1245 Property | Sec. 1250 Property | Land | ||
$35,000 of section 1245 property | $35,000 | |||
$45,000 of section 1250 property | 1 17,000 | $28,000 | ||
$20,000 of land | 1 3,000 | $12,000 | 1 $5,000 | |
Total | 55,000 | 28,000 | 12,000 | 5,000 |
1 Determined by taxpayer pursuant to subdivision (ii)(d) of this subparagraph.
For purposes of this paragraph the term qualified housing project, approved disposition, reinvestment period, and net amount realized shall have the same meaning as in section 1039 and § 1.1039-1 .
Example: Taxpayer D owns property constituting a qualified housing project under section 1039(b)(1). In an approved disposition, the project is sold for $225,000. The net amount realized on the disposition is $225,000 of which $175,000 is attributable to the section 1250 property disposed of. The adjusted basis of such property is $150,000 and thus the gain realized upon the disposition of the section 1250 property is $25,000. Assume that the total gain realized upon disposition of the project is $45,000. Within the reinvestment period, D purchases another qualified housing project at a cost of $200,000, of which $160,000 is attributable to section 1250 property. D elects, in accordance with section 1039(a) and the regulations thereunder, to limit the recognition of gain to $25,000, that is, the net amount realized ($225,000), minus the cost of the replacement housing project ($200,000). Under this subparagraph, $15,000 of the $25,000 gain recognized is attributable to the section 1250 property disposed of, that is, the net amount realized attributable to the section 1250 property disposed of ($175,000), reduced by $160,000, the greater of the adjusted basis of the section 1250 property disposed of ($150,000) or the cost of the section 1250 property acquired ($160,000).
Example: Taxpayer E disposes of a qualified housing project in an approved disposition. The net amount realized is $1,090,000 of which $900,000 is attributable to section 1250 property. The section 1250 property consists of (1) a reinvestment element with an adjusted basis of $300,000, additional depreciation of $100,000, and an applicable percentage of 50 percent, and (2) an additional cost element with an adjusted basis of $200,000, additional depreciation of $50,000, and an applicable percentage of 80 percent. Gain of $400,000 is realized on the disposition of the section 1250 property, that is, amount realized ($900,000) minus adjusted basis ($500,000). Within the reinvestment period, E purchases another qualified housing project at a cost of $1,000,000 of which $840,000 is attributable to section 1250 property. E elects, in accordance with section 1039 and the regulations thereunder, to limit recognition of gain (determined without regard to section 1250) to $90,000, that is, the excess of the net amount realized ($1,090,000) over the cost of the replacement project ($1,000,000). Under section 1250(d)(8)(A), the amount of gain recognized under section 1250(a) is limited to $90,000 (see subparagraph (1) of this paragraph). Under section 1250(d)(8)(F)(ii) and this subparagraph, $600,000 of the $900,000 net amount realized attributable to the section 1250 property is allocated to the reinvestment element, that is, additional depreciation for the element ($100,000) over total additional depreciation ($150,000) times the net amount realized ($900,000). The remaining $300,000 is allocated to the additional cost element. Thus, the gain realized attributable to the reinvestment element is $300,000, that is, net amount realized ($600,000) minus adjusted basis ($300,000). The gain realized attributable to the additional cost element is $100,000, that is, net amount realized ($300,000) minus adjusted basis ($200,000). Under subparagraph (5) of this paragraph, the gain recognized attributable to the section 1250 property is limited to $60,000, that is, the net amount realized attributable to the section 1250 property disposed of ($900,000) minus the greater of the adjusted basis of such property ($500,000) or the cost of the section 1250 property acquired in the transaction ($840,000). Under section 1250(d)(8)(F)(ii) and this subparagraph, $45,000 of the $60,000 gain recognized is attributable to the reinvestment element, that is, $60,000 multiplied by a fraction whose numerator is the gain realized attributable to the reinvestment element ($300,000) and whose denominator is the total gain realized attributable to all the section 1250 property ($400,000). The remaining $15,000 of the gain recognized is attributable to the additional cost element. The new property acquired has no additional cost element. The reinvestment element of the new property acquired consists of 2 subelements corresponding to the reinvestment element and additional cost element of the property disposed of. The subelement corresponding to the reinvestment element has additional depreciation of $10,000, that is, its additional depreciation immediately before the disposition ($100,000), minus $90,000, the amount of additional depreciation necessary to produce $45,000 of section 1250(a) gain where the applicable percentage is 50 percent. The subelement corresponding to the additional cost element has additional depreciation of $31,250, that is, its additional depreciation immediately before the disposition ($50,000), minus $18,750, the amount of additional depreciation necessary to produce $15,000 of section 1250(a) gain where the applicable percentage is 80 percent.
26 C.F.R. §1.1250-3